January 29, 2013

New Special Interest Group Pushes To Stop Natural Gas Exports

January 29, 2013

One of the outgrowths of increasing federal regulatory powers is the tendency of some large companies to use the government to restrict competition and make themselves better off at the expense of other Americans. The latest companies working to use the government to restrict competition and enrich themselves are Alcoa, Celanese Corporation, Dow Chemical, Eastman Chemical, Huntsman Corp., and Nucor Steel.

These companies, along with American Public Gas Association, have created a new organization called America’s Energy Advantage. The purpose of America’s Energy Advantage is to limit U.S. exports of natural gas. As America’s Energy Advantage’s website explains it, they believe in “[c]arefully considering the economic consequences before allowing unfettered natural gas exports.” They also want the federal government “to move cautiously on permitting natural gas exports.”

These groups want to limit free trade, but they do not want to appear to be anti-free trade. Instead they claim they want “[r]ules-based free trade and living up to trade commitments made under the World Trade Organization.” The reality is that they only bring up free trade to distract from the fact that limiting free trade is their goal.

Free trade in natural gas may lead to slightly higher natural gas prices, but the reality is that the U.S. is currently enjoyed historically-low natural gas prices as a result of a boom in production caused by hydraulic fracturing. In 2012, the average spot price of natural gas was less than $3 per MMBtu compared to over $6 per MMBtu a few years ago, with spikes over $10 per MMBtu.

There is nothing wrong with these companies wanting low-cost inputs, but what is terribly wrong is their desire to keep the price of natural gas artificially low through government actions to restrict trade by limiting customers for the natural gas. By doing so, the companies that make up America’s Energy Advantage would have lower costs but would benefit at the expense of those whose business it is to produce natural gas. Moreover, by advocating for government policies that limit consumption by competitors, they may in fact be producing higher natural gas prices for themselves and all consumers in the future. In their pursuit of policies they think might keep gas prices low, they may succeed in destroying their own businesses and investments by causing gas prices to skyrocket.

The reason that restricting exports might lead to higher domestic prices is quite simple: companies that search for and produce oil and gas use the same personnel, equipment and investment to produce oil or to produce natural gas. A company decides to target oil or natural gas depending on prices, since costs for producing either are closely proximate. At today’s natural gas and oil at prices, a company can choose whether to receive just under $20 for natural gas equal in energy to a barrel of oil selling for $95. This is not a difficult decision to make, and they are making it accordingly. For example, about 75% of the oil and gas rigs are now searching for oil in the United States, which explains the phenomenal growth in investment in places like the Bakken in North Dakota and Eagle Ford in Texas—both are oil rich. This is in stark contrast to the numbers just several years ago, when 80% of the wells were searching for natural gas, with 20% targeting oil. That is precisely what led to the huge growth in supply of natural gas that drove prices down.

This disparity between oil and gas prices ought to be evident to the companies pursuing government protection of their temporarily low prices for natural gas by limiting competition for the product. Obviously, if a company could sell its chemicals for 4.5 times as much to one customer as they could to another, the company would not be confused about the choice. Yet somehow, the companies and politicians who are behind efforts to restrict exports have not seen this parallel, or prefer to ignore it.

Alcoa, Dow and the rest want to limit natural gas exports, but they show no desire to limit exports of their own products. If these companies believe in restricting exports to preserve America’s “advantage,” shouldn’t they also want to limit the export of their own products? If limiting natural gas exports helps keep natural gas prices low, then limiting the export of chemicals would keep chemical prices low in the United States, as would limiting the export of corn and other grains, or any agricultural products for that matter. This would further help Americans and other industries, according to their logic. But an honest reader knows this isn’t true.

One more thing that should be noted is that Dow Chemical has a financial interest in the Freeport LNG facility. Dow’s ownership matters because this is the first export LNG facility application DOE will consider. Dow says they will not own part of the import facility, according to Politico, but the import facility will use some of the components of the export facility that Dow co-owns and Dow may receive user fees. Their initial investment, they say, was in the facility meant to import LNG. That is, until natural gas was made so abundant by hydraulic fracturing and horizontal drilling so that it is now poised to become an export facility. This change of fortunes happened because the government was not involved.

The fact that these companies have expressed no interest in limiting their exports to keep chemical or steel prices low in the United States shows that they understand how such limits would affect their own balance sheets, but doesn’t explain how they think other businesses will not be affected by supply, demand or price. Sadly, in President Obama’s America, all-too frequently big business is turning to working to use government to advance their own self-interest at expense of the rest of America. We saw it in the Wall Street bailout, and we saw it with the federal government handing out billions of taxpayer dollars to failing “green” companies with political connections. This is not the limited government that our Founders sought in order to protect individuals in their pursuit of happiness. This “beggar they neighbor” approach, which will weaken the U.S. and, in fact, promises to weaken their own businesses over the long run.

The answer—as it so often is—lies in more supply and in government policies which more accurately reflect the limits placed on Big Government by the Founders. Rather than using government to prohibit others from using natural gas, it would make much more sense for the companies to pursue policies to expand natural gas development. As an example, the companies could pursue policies that would get the Administration to lift its continuation of the moratorium on exploration on 85 percent of the offshore areas of the lower 48 through 2017. They could demand that the Secretary of Interior explain why it takes 307 days to permit a natural gas well on federal lands while in North Dakota it takes a mere 10 days. They could ask the President and Congress to demand from the Department of Interior that they reverse the decline in production of natural gas from offshore that has been underway for years. Or they could call on the Administration to sanction EPA for banning the use of coal to generate electricity, which is artificially hiking demand for natural gas when the U.S. has the largest coal supplies in the world. They could also ask the Administration to stop trying to seize more powers over hydraulic fracturing that more appropriately reside with the states. After all, without hydraulic fracturing, and without the states’ prudent regulatory decisions, none of the new supplies would exist.

All of these policy initiatives require less government interference in our economy, and would allow the private sector to keep generating both energy and jobs, with the side benefit of increased revenues and energy security. This is an approach more in line with American principles and our Founders.